Trustees

The trustee will be the owner or holder of legal title of your trust property and the manager of the trust. This is known as a fiduciary role. They are responsible for all the decisions, choices, and transactions concerning the trust. They should be held to an objective standard for the management of the trust property (duty of prudence) that may include investing assets in a way to assure reasonable growth with minimum risk, unless you specified otherwise.

There are subsidiary rules to guide their management that include:

  • Treating the beneficiaries equally (duty of impartiality), unless the trust authorizes it;
  • Not using the assets for your own benefit, unless the trust authorizes it;
  • Not mixing trust property and their personal property; and/or 
  • Keeping an account for beneficiaries (duty to account and inform).

Who to Choose

Your choice of trustee may be the most important decision about your trust.

  • If you have revocable living trust you will most likely choose yourself as trustee. You could choose yourself for an irrevocable living trust, but that would make the trust available to creditors.
  • Another trustee must be chosen if you would prefer not to or can’t be the trustee, and/or you would like to name a co-trustee or contingent trustees. They can’t be a minor, but they can be a beneficiary and they must be able to function as your agent.

You should look for certain qualities in your trustee.

  • Above all you need to choose someone you trust.
  • Integrity and objectivity are key traits for your trustee.
  • Although it is not crucial, it’s better to choose the most qualified person, one who can handle the financial and legal complexities of managing a trust.
  • Your trustee will eventually have to work with your beneficiaries, so should be capable of tact and diplomacy.
  • If they are working with co-trustees, they should be able to cooperate and compromise with them when necessary. 

You may choose a professional trustee such as an attorney, but this is more expensive up front.

You may choose co-agents with similar or different responsibilities. However, you must make plans for times when they might disagree. This may include giving one trustee the final say or requiring that all decisions must be unanimous and made by compromise if necessary.

It is best to name a back-up or successor, if your:

  • Spouse is your trustee and you divorce;
  • First choice resigns or something happens to them;
  • Trustee becomes unwilling or unable to perform their duties, although they can’t resign without the consent of all of the beneficiaries or the court.

Duties of a Trustee

The trustee will retain the role as long as they are able to. The successor trustee will assume power over your revocable living trust if you become incompacitated or from the beginning if you prefer an irrevocable living trust. The trustee will assume control over any trust existing after your death. It is a lot of responsibility for the successor since they are liable for any debts or liabilities that the trust incurs.

Many of the powers of a trustee are regulated by state law and differ from state to state. If you have assets in different states, make sure the action is allowed in that state.

Any duties you want to specify for successor trustees should be explicitly detailed in the will or trust document, such as what investments to make, when and how to distribute income and principal, or what reports you need to make to beneficiaries. If you have co-trustees, the more details you provide the less chance there is for disagreement.

Any successor or co-trustee must manage the trust carefully, skillfully, cautiously (duty of providence), and impartially. Other duties of the successor trustee will depend on whether they are managing a living trust for you or a testamentary trust for your beneficiaries.

Although they may be trying to follow your wishes, they are managing the trust in the interests of you or your beneficiaries (duty of loyalty) and may need to resolve conflicts. Most trusts require them to inform you and/or your beneficiaries of all transactions associated with the trust.

Your chosen trustee(s) will need to be familiar with the trust and its provisions, know where the trust document and other important papers are located, have access to credit card information, be given username and passwords to all sites, and have shared access to safety deposit boxes.

If the trustee or trustees do not perform their duties, the trust will become passive and ownership (legal title) will pass to the beneficiaries. If the trust has been mismanaged and assets are improperly disposed of, the beneficiaries can recover them if they are traceable back to the trust. For example, if a trustee wrongfully sold or gave away trust property, the beneficiaries can recover it if they can provide the proof.

Living Trust

There are various tasks a trustee should be expected to fulfill in their role. The number of tasks increases if the trust is revocable since they would be allowed to alter the trust in addition to managing it.

You will manage your trust while you can, but once your successor becomes trustee it becomes their’s to manage. In many cases, they will need documentation of your incapacitation from your healthcare provider.

If your successor trustee assumes their role as trustee due to a temporary disability you can resume your role as soon as you are able to without involving the court.

Specific Tasks

  • Managing day-to-day finances, such as:
    • Collecting, depositing, and keeping track of all income, including insurance benefits that may come with disability;
    • Using assets to take care of you and/or your dependents;
    • Paying all ongoing costs of managing the trust;
    • Controlling all distributions and expenditures by the trust; and
    • Keeping detailed and accurate records of all financial transactions, such as income received and bills paid.
  • Preparing and filing all required income tax and estate tax returns, and paying all owed taxes.
  • Investing the assets for you and/or your beneficiaries’ benefit according to your wishes.
  • Making legal decisions about the estate.
  • They may be responsible for applying for disability benefits for you, overseeing your care, and/or being responsible for your minor children and other dependents.
  • Protecting you against scams or people preying on you if you have a terminal illness.
  • If the trust is revocable, creating or revising trusts for you or transferring your assets to existing trusts
  • They can make gifts on your behalf using guidelines that you specify.
  • Continuing to manage your trust until it is dissolved and the remaining assets distributed to your beneficiaries.

If your trustee is taking over because you have become incompacitated, they may need to:

  • Have one or more doctors certify that you are not physically or mentally able to handle your financial affairs (the certificate will be requested by banks and other financial organizations before dealing with the trustee);
  • Make sure you are receiving appropriate care and oversee it if needed;
  • Find and give copies of healthcare documents (medical power of attorney, living will, etc.) to the healthcare provider;
  • Notify the healthcare proxy and/or power of attorney;
  • Apply for disability benefits through your employer, social security, private insurance, and veteran’s services;
  • Notify the bank and other professionals that they are now your trustee;
  • Consult any professionals that may be helpful (lawyer, accountant, banker, insurance and financial advisors); and/or
  • Take care of or arrange care for minor children, disabled adults, other dependents, and pets.

Testamentary Trust

The role of the trustee begins after your death. The various tasks they would be expected to fulfill as trustee depend on the goal of the trust. If it is to transfer the trust to the beneficiaries, the trustee would manage the trust only as long as it takes to disburse the trust and close it down. If it is to manage the trust for the beneficiaries, the trustee would manage to trust for the length of time specified in the trust (may be a discrete time, until the beneficiaries reach a certain age, or in perpetuity). They may need to contact an attorney to review the trust and process.

Specific Tasks

After your death your trustee will be responsible for organizing, protecting, and paying off debts and taxes for your estate.

  • This will begin by locating the assets listed in your trust and getting copies of your death certificate, which most institutions will request before dealing with the trustee.
  • Any life insurance policies, annuities, and retirement accounts that your trust has been named as the primary beneficiary will need to be identified and collected.
  • If the trust was created in your will, the probate court becomes involved and they will need to coordinate with the personal representative or executor of your estate. If not, the trustee can begin managing the trust immediately.
  • It will be necessary for the trustee to know the values for your trust assets on your date of death, including professional appraisals of real estate and business interests. They may need a specialist appraiser for rare or unusual items or an extensive collection, such as coins or stamps.
  • Your creditors will need to be identified and cash raised to pay off these debts. While assets in a trust created in your will are available to creditors, some assets in a trust created by a living trust may be protected from creditors
  • They may need to pay the funeral/burial costs from the trust.
  • They must determine if your estate will incur any estate or other tax and pay those.

 

After the estate is organized and debts paid, the trustee must manage the estate.

  • The trustee is responsible for day-to-day finances, including:
    • Collecting, depositing, and keeping records of all income to the trust;
    • Controlling all distributions and expenditures by the trust for the sake of the beneficiaries;
    • Paying all ongoing costs of managing the trust; and
    • Keeping detailed and accurate records of all financial transactions.
  • They are required to prepare and file all required income tax and estate tax returns, and pay taxes
  • They will invest your assets according to your wishes (unless it conflicts with the needs of the beneficiaries).
  • They have the power to make legal decisions about the trust.
  • They should continue appropriate insurance until the trust is closed
  • They will protect your beneficiaries against scams or others threats to the assets.
  • They can make gifts on your behalf using guidelines that you specify.
  • They will continue to manage the trust until it is dissolved.
  • They should consult financial and legal professionals if needed.
  • When the time comes, they will distribute the remaining assets to your beneficiaries according to your wishes and close the trust.

Although the trustee theoretically can’t delegate tasks they could reasonably do themselves, they are allowed to hire financial advisors to make investments, accountants to handle taxes and bookkeeping, and lawyers to advise on legal matters if necessary.

Compensating Your Trustee

Trustees are entitled to be compensated for their role in managing your estate. Whether they will take the fee depends who you choose. Professionals will charge a fee and other non-family trustees will likely expect one. Family members often do not accept compensation, but that may depend on the work involved, their relationship to you and your beneficiaries, and whether they have been chosen for their professional expertise. The fee is taxable income for the trustee, so if they are a beneficiary a fee may not make sense because they may be inheriting money tax free and not want to pay income tax on the income that comes out of the estate for the trustee’s compensation.

The fee amount is usually established in the trust document and the money comes from the trust itself. It is considered a tax deduction for the trust. 

Banks, trust companies, and law firms will typically charge a percentage of the estate — especially if it is a large estate. This is often a one-time 1%-2% for estates settled within a year or yearly fee of 1%-2% for the duration of long-term trusts. Others may bill by the hour for the time they spend managing the trust, by a percentage of each transaction made on behalf of the trust, or a flat fee. In many cases, these fees are determined by the amount of work involved and the complexity of the trust.

Some states have specific rules for trustee fees that will determine the fee if not specified in the trust document. Most states will have rules for executor fees that may be used as a guideline if there are no rules for trustee fees.

When hiring professionals you may have little input into the fee, but it helps to know a few details in case you can haggle. These details may also help you if a family member or friend is your trustee.

Determining what is reasonable can be difficult, but most agree that 1% of the estate per year is a good goal when there is a choice. Court generally consider an annual trustee fee of 1% to be a fair minimum compensation.

The courts could become involved if your trustee petitions them for a higher rate when the estate is complicated enough to require a lot of extra time and work. Consulting with a professional experienced with trust work may be able to help you determine appropriate fees based on the circumstances.

You may want to start with a yearly fee that’s 1% of the trust value (or other amount or percentage professionals typically charge in your area) and adjust it based on the following factors.

  • The primary determinant is the amount of time and work involved in managing the trust. This would include how much administering the trust affects a nonprofessional trustee’s life.
  • There are important factors related to the amount and character of the trust assets.
    • How large the trust is and how many transactions are required when managing it.
    • The number of bills to pay and overall expenses for administering the trust.
    • How complicated and/or difficult it is to manage the trust.
    • How much income the assets generate.
  • The trustee’s level of expertise and experience.
    • You would pay someone with professional knowledge and experience more for their time.
    • Someone with less experience will most likely need to consult professionals and pay their fees. This may result in less time spent managing the trust.
  • Any non-financial responsibilities involved, such as monitoring beneficiaries.
  • As the owner, the trustee is legally responsible for the trust and the level of legal risk they are assuming by managing the trust should be taken into account.
  • How well the trustee does their job.

Any qualified beneficiary should be given the opportunity to object if the proposed annual amount of compensation is more than 1%. Therefore, it is important to give them written notice.

  • They must submit their objection in writing within a specified period of time along with why they are objecting.
  • If there are objections, the trustee could either seek to privately resolve any concerns with the beneficiaries or pursue other avenues such as petitioning the court or arbitration — which are very expensive.

The beneficiaries should be notified of the amount and timing of trustee’s compensation and any time this changes.

In addition to fees, trustees are entitled to reimbursement for any out-of-pocket expenses related to the management of the trust such as travel expenses, storage fees, taxes, insurance, or other expenses.

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